BoAML extends $1.5bn Fortescue loan syndication

Bank of America Merrill Lynch has extended the syndication period of the $1.5 billion loan it underwrote for
Fortescue Metals
until the end of September, sources say.

The bank is in the process of syndicating the 16-month loan it underwrote for the iron ore miner just over a month ago. It first expected credit-approved commitments last Friday.

While it is not unusual for banks to stretch syndication cycles for large loans or in market volatility, the move may be a symptom that the bank is struggling to sell down the loan, the sources said.

Recent deals forced into extended or multiple syndication periods include the $2 billion loan of Seven West Media and the $245 million loan to Archer’s Healthe Care, which was fully underwritten by Morgan Stanley. Those loans, however, were of longer duration (three to five years), and offered lower margins than those on offer from the Fortescue deal.

It is also not unusual for investment banks to show their most valued (profitable) clients support by temporarily lending their own balance sheet. By underwriting $US1.5 billion for Fortescue just months after the miner had to put assets on the line to convince 10 banks to provide $US956 million in leasing facilities, BoAML demonstrated it had both, the confidence in its client and the balance sheet to do it.

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Only time will tell if the ultimate payout for the US bank makes the current heat worthwhile. Fortescue – the fourth largest iron ore miner in the world – has been hurt by a 37 per cent fall in iron ore prices to less than $90 a tonne, a 42 per cent drop since April.

The listed miner has more than $10 billion in debt and its share price has also fallen drastically.

It faces credit rating downgrades from Moody’s Investor Service and Fitch Ratings, which have put negative outlooks on Fortescue over the last fortnight.

The company has announced asset sale programs and capital expenditure cuts, saying it will cut $300 million in operating costs, and has pulled back on $1.6 billion of expenditure in the Pilbara.

“The successful implementation of announced initiatives to reduce capital expenditure and operating costs should alleviate some of the liquidity and covenant pressure Fortescue is facing" Moody’s analyst Matthew Moore said.

All these moves are “credit-positive" for the miner. It is unclear whether any bank committed to the loan by last Friday, but a number of banks contacted by Capital said they were actively assessing the deal.

The banks invited to buy the loan are assessing whether to take the attractive fees and margin on offer.

A key consideration, however, is whether moves to cut costs and debt offset the risk that the price of iron ore remains low, or worse, falls further in the next 16 months.

JPMorgan’s analysts say if ore prices further plummet, Fortescue faces a potential further funding shortfall of $US1.5 billion, and an equity capital raising may be the answer.

“We’ve been disappointed with the way FMG have handled its funding shortfall, in deferring its expansion rather than undertaking an equity raising," Lyndon Fagan wrote to clients last week.

However, Mr Fagan said if iron ore prices were to stay at current levels, Fortescue could go almost another year without requiring further funding, “which suggests the company will wait to see what the iron ore price does before making any more drastic moves to secure funds (eg, raise equity or sell part of a core asset)".

Provided not enough commercial banks in the region agree to buy the loan, BoAML can always hold some of it to maturity. It can also try to sell its exposure to funds in the region or in the US high yield market – home to most of Fortescue’s $US7 billion bond investors.

To take the heat off its back, however, those investors may force BoAML to offer the loan at a discount. and therefore take a haircut on its $US1.5 billion loan.